Transition risks assessment by Latin American financial institutions and the use of scenario analysis

To provide evidence on the relevance of climate-related risk for financial institutions (both investors and banks) in Latin America, this report takes a closer look at how and which transition risks could affect the economy, local capital markets, and consequently financial portfolios in the largest financial markets in Latin America, namely Brazil, Chile, Colombia, Mexico and Argentina. In order to do so, the data analysis covered in this paper combines three types of data: physical asset-level data, financial data, and investors’ portfolio data. 

The analysis finds, among others :

• that Colombian insurers and pension funds listed equity portfolio might be potentially exposed to transition risks arising from investments in coal mining, coal power, oil power and ICEs production companies. To fully seize the opportunities the transition will bring with low carbon alternatives, the companies in the portfolios of both investors need to significantly increase their investments in nonconventional renewable energy sources. 
• that pension funds and insurers are not seizing the opportunities the low-carbon economy could bring with nonconventional renewable energy sources as the power capacity additions of the companies in the portfolios are lower than the ones required in a 2°C scenario.
• that the most suitable climate-risk mitigation strategies financial institutions could opt for, are does that aim at a behavioral change from investee companies and clients. This is the recommended strategy given the high level of concentration of most markets, their low liquidity, and the low risk tolerance of some investors represent a barrier for the implementation of mitigation strategies focused on asset allocation (e.g. divest/invest, exclude).